New ‘Future Fund’ to support innovative UK businesses

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The Future Fund is for businesses that have been unable to access other government business support programmes (CBILS, CLBILS and BBLS), because they are either pre-revenue or pre-profit and typically rely on equity investment.

Under the scheme, funding will be unlocked by private investment on a match-funded basis, the effect of which is to double the amount of investment available to a company.

Loans will range from £125,000 to £5,000,000.

On Monday, the Government provided further detail of the Future Fund scheme, which can be found here. The online application portal is accessible as of 20 May 2020. Like the other government business support programmes, the Future Fund operates in partnership with the British Business Bank and applications under the scheme can be made until the end of September 2020.

Initial reports confirm that the fund received £450 million worth of applications on its first day alone, suggesting that demand for Future Fund loans will be incredibly high.

Key features of a Future Fund loan

  • A minimum interest rate of 8% per annum (non-compounding)
  • Interest is not payable monthly, but accrues until the loan converts (see below) when accrued interest is repaid or converted into equity in the company.
  • Interest is only charged on conversion of a loan into shares or an event of default by the company.
  • the term of the loan is 36 months
  • The loan can’t be repaid early without the agreement of all investors, but will convert into shares in the company in certain circumstances, such as an exit or a new funding round
  • There are no restrictions on the industries eligible businesses can operate in
  • Companies that have received other types of Government COVID-19 aid can also apply to the Future Fund.

Eligibility requirements

The scheme is open to eligible applicants who meet the following criteria;

  • the company must have raised £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive)
  • they must have at least £125,000 in matched funding from third party investors. Clarity is awaited as to what is meant by “third-party” investors and whether this would, for example, work in conjunction with investments from Government-backed equity funds or State Aid rules
  • if the company is a member of a corporate group, it must be the ultimate parent company
  • the company must not have any of its shares or other securities listed/quoted on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue
  • the company must be a UK incorporated limited company, limited by shares (sole traders, partnerships, LLPs and unincorporated bodies are not eligible, nor are companies whose shares are traded on public exchanges) and must have been incorporated on or before 31 December 2019
  • 50% or more of its employees must be UK based, and/or 50% or more of its revenues must come from UK sales

How to make an application under the Future Fund

Lead investors will apply on behalf of businesses (and other investors), via the online portal, with applications being processed on a first come first served basis.

The company itself does not initiate the process, but will be required to verify the details submitted by the lead investors. The business needs to identify a lead investor to submit the application for them; any person can be a lead investor, so long as they have made a commitment of at least £12,500.

Information about the lead investor and the other investors is used to conduct background checks, to create the legal contracts, and circulate these for signing.

Things to consider before applying for a Future Fund loan

Loans are advanced under a convertible loan agreement, and cannot be used to:

  • repay shareholder or related party loans (other than under any bank or venture debt facilities),
  • pay dividends,
  • pay bonuses or discretionary payments that are non-contracted or not in the ordinary course of business for 12 months, or
  • pay placement or similar corporate finance type fees in relation to the convertible loan agreement.

The majority of the terms of the loan (and the convertible loan agreement) are non-negotiable, but companies and investors will still need to appoint lawyers, because of the requirement for a firm of lawyers to confirm in writing that they hold the match-funding from investors in their client account.

Loans under the Future Fund are not SEIS/EIS compatible. If companies are able to find investors willing to participate in loan arrangements as part of the Future Fund, be aware that the standard Future Fund documentation doesn’t contain a standard set of investment terms. So, the scheme could prove to be expensive for companies where their lead or co-investors seek supplemental terms.

The scheme, overall, is likely to be less attractive to start-up companies than traditional seed or angel investment. Start-up companies should therefore explore other financing/investment options before applying for a loan under the Future Fund scheme.

You can find details of other government measures to support public services, people and businesses through this disruption on the Government’s Business Support website.

For more information on the CBIL, CLBIL and BBL schemes and to make an application under these schemes please visit www.british-business-bank.co.uk.